The lack of a vehicle is one of the top barriers to escaping poverty, according to the Annie E. Casey Foundation. That’s a key reason why, at $78 million asset Greenville (S.C.) Heritage Federal Credit Union, nonprime auto lending isn’t merely a sideline, it’s a mission.
“It allows us to serve the folks banks have shut the door on completely,” says Alan Berry, CEO of the NCUA-designated low-income credit union.
Nonprime, or subprime, lending is the practice of making loans to borrowers with blemished or nonexistent credit histories, or those with limited payment capacity. Properly managed, nonprime loans give credit unions the means to help members who have limited options while increasing loan portfolios and yields.
Nonprime loans—C, D, and E paper—make up 40% of Greenville Heritage Federal’s entire loan portfolio, not just auto loans. The credit union’s nonprime auto loan rates start at around 12%.
Members with credit scores below 550 pay 17.99%—far less than the 28% or more they’d pay elsewhere in town.
The credit union has no minimum required credit score for auto loans, although “that doesn’t mean we lend to every 450 [score] that comes through the door,” he says. “But we don’t automatically turn anybody away.”
Last year, charge-off s stood at 1.49% while delinquencies usually range from 0.75% to 1% for the entire loan portfolio, of which auto loans comprise 60%.
“But our loan yield is still at more than 8%,” Berry says. “The key is to keep the rates high enough so you can stomach the charge-off s.”
Constant monitoring and centralized underwriting are critical success factors, he adds (“Seven steps to subprime success,” p. 29). When the delinquencies and charge-off s begin to nudge uncomfortably high, “we pull the needle back,” he says. “You have to constantly adjust your risk tolerance.”
NEXT: Preventing ripoffs